A simple approach to successful personal investing with the goal of generating a growing income from a portfolio including cash savings, shares, corporate bonds and government-backed investments, using online savings and brokerage accounts and shielding your investments from tax wherever possible.

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Thursday, 28 February 2013

Portfolio Buy: Persimmon (LSE:PSN)

﻿﻿﻿﻿﻿﻿﻿Persimmon - the UK's leading house builder - is one of my 'legacy' shares (i.e. one that I have held on to, despite being a disappointment). I have been reluctant to recommend it as it hasn't paid a dividend for the past year or so. However, the share price has been recovering and I am almost 'above water' on the purchase price.﻿﻿﻿﻿

But what is more: the Easter Bunny may be bringing an unexpected boost.
﻿﻿The company name apparently comes from a Derby-winning horse in the 19th century. If it were a horse, then it fell at the first hurdle and probably should have been shot (out of kindness). I bought it initially in 2007, and then topped up (at half the price) in 2008 and subsequently watched the share price gyrate quite dramatically as the dividend was reduced then cut completely. For an ‘income’ share, this is a basic ‘no-no’. But the business model seems to be sound enough; it’s just that people stopped buying houses.

Having a bit of a fixation on the purchase price is a recognised psychological compulsion (it’s called anchoring) but for better or worse I have held on until now, when the value of the shares is within a whisker of what I paid for them.

The 'Easter egg' is contained in the company’s latest annual report. The good news is that the company has been going ‘great guns’ and at the end of 2012 was sitting on a cash pile of over £200m as well as controlling 68,200 building plots in their forward land bank. But the key announcement was that: “the Directors plan to return 75p in cash to shareholders for each ordinary share held at 6.00pm on 19 April 2013”. This payment is part of a planned programme of increasing two-yearly returns of capital to shareholders.

The share price today is under £9 (obviously this might have changed by the time you read this). The return provided by this return of capital over the longer term looks just about acceptable; but for a short-term play it looks particularly interesting. If I have understood it correctly, buying this share today will (probably) give you a yield of over 8% by the end of April. I’m guessing that the share price will rise over the coming 7 weeks or so in response to this long-term support to the share price. Although the price will fall after the dividend is credited - I'm guessing that the share price will still be underpinned by the continuing programme of capital returns.

In annual terms, this is a huge return - and with relatively little risk, given that the 'new housing' market is clearly recovering. Now I’ve found out about the Easter egg that is probably coming, I have topped up my holding - this is now my largest dividend-share position. Will it gallop home - or fall again?

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.